Card debt falls in February

Debt on credit cards fell sharply in February, the Federal Reserve
announced Monday, extending January's slide for a second month despite an
overall uptick in consumer spending.

Revolving debt, which is mostly made up of credit card
balances, shrank at a seasonally adjusted annual rate of 3.4 percent to $854.2 billion, according to the Federal
Reserve's monthly report on
consumer credit. In January, card debt declined at a 0.3 percent rate.

Total short-term consumer debt was up, however, rising by 6.4
percent to $3.13 trillion, the Fed said in its monthly G.19 report. Total consumer debt adds student loans, car
loans and other installment loans to credit card debt.

"[S]pending on goods picked up some, which leaves us
hopeful that the consumer will come back in full force as the snow melts,"
TD Economics Senior Economist Michael Dolega said in a research note. Unusually harsh winter weather put a chill on
consumers' activity in January. Consumer spending was up 0.3 percent in
February, a rise of $30.8 billion. Personal income also rose 0.3 percent, the
U.S. Commerce Department said.

Rising income gives consumers the confidence -- and
resources -- to spend more, and credit cards are a favorite tool for spending. On the other hand, more income also provides
firepower to pay down existing balances on cards. Of those two effects, "I
think we're going to see some of both," said David Ely, an economist and
finance professor at San Diego State University.

Card use shifts
Some consumer spending has shifted away from goods typically
bought with credit cards -- and that's not a bad thing for household budgets,
economists said.

"I think it's a healthy response," said James
Johannes, economist and finance professor at the University of Wisconsin. He said that since 2010, purchases of durable
goods -- such as cars and appliances -- have grown faster than spending on
clothes, food and other nondurables.

"The contribution that consumption has been making to
GDP is just going down," he said. "It's coming more in durable goods
-- that's not credit card stuff."

The spending shift is reflected in the makeup of consumers'
short-term debt. In 2013, revolving debt
grew 1.3 percent, compared to a 7.9 percent rise in nonrevolving debt. In 2012, revolving debt was up just 0.4
percent while nonrevolving debt rose 8.7 percent.

In a report April 2, the American Bankers Association said
people are using credit cards more for making transactions, and less as a tool
for borrowing. The average balance fell
more than 5 percent during the third quarter of 2013, the study found, even
though transactions on cards were up. Card debt was 5.4 percent of disposable income, "near the lowest
level in more than a decade," the ABA said.

The people who would have abused their credit card have been washed out
of the system.

-- James
Johannes
professor, University of Wisconsin

Johannes said that write-offs during the recession purged
many card users from the rolls, leaving lower-risk users who take on less debt.
"The people who would have abused their credit card have been washed out
of the system," he said.

Some reduction in card balances is the result of banks
writing off bad debts, making it complicated to interpret changes in total
balances. Write-offs played a major role
in the plunge of card balances during 2009 and 2010, but are relatively small
now, as late payments hover near record lows. The delinquency rate on card balances was 2.39 percent in late 2013, the
bankers' association said, the lowest rate since at least 1991.

Warming trend
Consumers' borrowing decisions come amid gradual improvement
in the job market. The unemployment rate in March held steady at 6.7 percent --
the same rate as February -- as the economy saw a healthy influx of new job
openings, and a surge of job seekers to fill them.

However, the underemployment index is 12.7 percent, counting
both jobless people and those who are working part-time because they can't find
full-time work. "There are still a lot of people who haven't returned to
the labor force, or are working in part-time jobs," Ely said.

The Fed is looking for the job market to get healthier
before raising interest rates -- a move that will hit card users in the wallet.
In her first meeting as Fed chair in March, Janet Yellen indicated that the
economy has a way to go before that step, saying there's still
"substantial slack in the labor market."

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